JUDGE HOLMES WILL NOT BE POKED

No, this is not the latest entry in the #MeToo log. Judge Holmes is steadfastly refusing to be detoured from determining the intent of the parties, notwithstanding the nine-prong debt-vs-equity cheval de frise erected by 9 Cir.

“We of course follow this caselaw, and discuss each of these factors, but will not let ourselves be poked by any of these prongs away from our goal of discerning the parties’ intent at the time of the advances. Bauer v. Commissioner, 748 F.2d 1365, 1367-68 (9th Cir. 1984), rev’g T.C. Memo. 1983-120.” 2018 T. C. Memo. 18, at p. 11.

Mike got more than infection; Hugh and Mrs Hugh spent the $11 million Mike claims he lent them (but which IRS claims is equity) for the scuba business, and claimed bad debt when the business was under water (sorry guys).

Well, no demands, no due date, no periodic (or otherwise) payments, no interest, no attempts to collect, subordination to other financing, and no notes until Mike’s trusty lawyers got aboard. Judge Holmes trudges through all nine (count ‘em, nine) factors. There are a couple neutrals (it’s Judge Holmes, after all), and Mike wins one (a bank or two did lend to Hugh and Mrs Hugh), but the rest are losers.

Especially so are the notes, drawn up well after the advances which they evidence were made, and after Mike had a big capital gain which needed speedy burial. “We specifically find that the promissory notes, the sale of the note to Mrs. [Hugh], and the deferred compensation agreement were more likely than not orchestrated by Burke and his attorneys to offset the large capital gains Burke had from unrelated interests….. They are not proof of what they purport to show happened before they were all executed.” 2018 T. C. Memo. 18, at p. 8.

Maybe Mike can take a capital loss when he disposes of the stock he got from Hugh and Mrs Hugh, but he didn’t do it in the years at issue.

IRS wants heavy-duty Section 6662(a) five-and-tens. But guess what? IRS has another Mike to contend with: Michael Corleone. Nothing in their hands from Boss Hoss. So even though Mike couldn’t reasonably rely upon his attorneys who concocted the note dodge, no chops.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 51 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the United States ... Continue reading →